Eurozone Industrial Production; update from Bunzl
Europe is primed for a positive open on Monday, on expectations the Fed will maintain its dovish message later this week. In Asia, most major stock benchmarks were higher, along with the dollar and oil, but gold prices lost further ground and Treasury yields were flat.
European shares should extend gains on Monday, with the Stoxx Europe 600 likely to push further into record territory, as investors look ahead to an expected dovish Fed meeting this week.
"There's probably some chance of a bit more of a 'let's-see-what-they-have-to-say type of approach," said Jim Baird, chief investment officer of Plante Moran Financial Advisors. The big question is whether policy makers will come forward with details about their thinking around an eventual tapering of the Fed's bond-buying program, offering investors "more of a peek behind the curtain," he said.
Several Fed officials have said the Fed should begin contemplating when it would be appropriate to discuss easing up on purchases. Investors also have been parsing details surrounding inflation.
"The question now is, is this the beginning of a 1970s-style spiraling of prices, in which case that would be very bad for the markets," said Eric Diton, president of The Wealth Alliance, which oversees more than $1.2 billion of assets. The market appears to think inflation spikes will be transient as the shortages of goods in the pandemic will prove temporary, according to Mr. Diton.
Stocks to Watch: Royal Dutch Shell is reportedly reviewing its holdings in the largest oil field in the U.S., according to reports Sunday. The potential sale could include all of Shell's 260,000 acres in the Permian Basin, mostly in Texas, as the company refocuses on existing production elsewhere and transitions to lower-carbon ventures, Reuters reported, citing unnamed people familiar with the matter. Such a sale could raise as much as $10 billion, CNBC said, also based on an unidentified insider familiar with the talks. The sale was not expected to be imminent.
The dollar continued to strengthen against other major currencies on Monday, albeit in thinner trading volumes in Asia, with markets in China and Hong Kong closed for holidays. DailyFX.com said for the week ahead, investors will likely focus on U.S. retail sales and the FOMC meeting.
Capital Economics said the dollar should strengthen against most currencies over the next 12-18 months, as Treasury yields rise continue to rise.
"To a large extent, that view is based on our forecast for a relatively uneven global economic recovery in which the U.S. economy outperforms thanks to its significantly larger policy stimulus," said Capital Economics economist Jonathan Petersen. A fall in commodity prices should also lift the dollar, he said.
Beyond 2022, the dollar could reverse its gains as yield gaps shift in favor of the rest of the world as other economies catch up with the U.S., he said. The dollar is "moderately overvalued," warranting a gradual depreciation over the medium term.
JPMorgan economist Michael Feroli has told clients the Federal Reserve is likely to lift rates sooner than expected, due to reduced risks from the coronavirus pandemic and rising inflation expectations. "We are bringing forward our expectations for liftoff to late 2023."
Mr. Feroli also expects some "perfunctory" discussions about tapering asset buying. "If we are correct that they talk about tapering, then our best guess is that we learn about that discussion in the chair's prepared remarks at the start of the press conference," he said, adding "we would also expect Powell to quickly follow this up by observing that the economy is still some ways away from meeting the 'substantial further progress' goals."
The Russian central bank could raise interest rates by a further 75-100 basis points later this year, pushing the ruble higher, said Unicredit. The central bank on Friday raised its key rate by 50 basis points to 5.50% and said increased inflationary risks could lead to further rare rises at upcoming meetings.
The prospect of further rate rises, combined with higher oil prices, should lift the ruble further this year, said Unicredit analyst Artem Arkhipov. However, inflation should ease next year, prompting the bank to become more "dovish" and reduce the real inflation-adjusted policy rate to around 100-150 basis points, he said. "This could lead to moderate pressure on the RUB if other central banks turn more hawkish in 2022."
Treasury yields traded in line with Friday's close of 1.462%, with inflation remaining in the center of the debate.
Bank of America worries that temporary inflation could last long enough to have lasting effects. "These 'temporary' pressures will probably persist for many months and could become embedded in inflation psychology." The bank said even though there are reasons to dismiss much of current inflation as temporary, "it will remain important to monitor whether transitory inflation passes through into stronger persistent inflation."
A slowdown in new euro-denominated bond issuance could boost corporate bond spreads, said Mizuho. Euro corporate-bond supply was very low Thursday due to the European Central Bank's policy decision and "it will be important to see now whether, on the back of ECB dovishness, deal flow picks up again in the coming days."
If not, "the summer lull may come sooner rather than later, which would feed into even greater momentum for credit spread tightening," said analysts at the bank.
Oil futures continued to push higher in Asia, after they tallied a third-weekly gain to finish at a more than two-year high on Friday.
The market "can't ignore the clearly bullish signal" from the IEA report, in which the energy agency called for more oil to be produced by OPEC+ "to meet the oil demand recovery of 2022," said Louise Dickson, oil markets analyst at Rystad Energy.
"Supply conservatism by OPEC+ has supported oil prices since last year and is the reason prices have now reached such highs," she said in a daily note. "There is definitely room for OPEC+ to boost output from the second part of this year and as long as this doesn't happen, there is a definite upside for oil prices."
Data from Baker Hughes on Friday suggested that U.S. production may soon rise, as the number of active U.S. rigs drilling for oil was up by six at 365 this week.
Gold extended Friday's decline, with strength in the dollar helping to send prices to their lowest finish in more than a week.
Prospects that the Fed could be less dovish at this week's FOMC meeting also soured the mood in Asia. Recent gains in labor and the red-hot inflation figure raise the risk that the Fed will be less dovish, although expectations remain that it will stick to its 'inflation is transitory script' is high, said OANDA.
The precious metal is likely to trade in the $1,870-$1,900 range in the run-up to the FOMC decision, said OANDA.
Copper prices were steady on continuing uncertainty over the presidential election outcome in Peru, the world's No. 2 producer of the base metal.
The results won't be finalized until a process for contested votes is completed, but Pedro Castillo's lead over Keiko Fujimori is raising concerns that the leftist candidate might raise taxes on mining companies, and jeopardize the planned capital expenditures needed to increase supply in the longer term, said TD Securities.
Recently, the three-month LME copper contract was little changed at $10,005.50 a metric ton.
TODAY'S TOP HEADLINES
G-7 Leaders Rally to Biden's Call to Challenge China
CARBIS BAY, England-Leaders of the Group of Seven wealthy democracies called on China to respect human rights but stopped short of an outright condemnation of Beijing, as President Biden sought to build momentum for an international coalition to counter Chinese influence in the world.
A 25-page joint statement released by leaders of the G-7 nations on Sunday-covering issues ranging from pandemic recovery to the global economy, tax, trade and girls' education-asked China "to respect human rights and fundamental freedoms, especially in relation to Xinjiang and those rights, freedoms and high degree of autonomy for Hong Kong." The same section of the statement said the G-7 would continue to consult on how to challenge China's behavior in the global economy.
Markets Are Leaving Little Room for the Fed to Be Wrong on Inflation
Investors have faith in the Fed. Over the past three months consumer prices, excluding volatile food and energy, have risen 2%, equivalent to a shockingly high annual rate of 8.2%. Rather than panic and dump bonds, investors have piled into Treasurys and pushed 10-year yields back down to where they stood in late February. Confidence in the central bank is absolute.
To be fair, the Fed is probably right: This burst of inflation is probably transitory. The reopening of the economy released a surge of pent-up demand, while supply bottlenecks are restricting production and distribution. As things get back to normal inflation should calm down.
Europe Keeps Aiding Companies to Avoid Surge of Covid-19 Insolvencies
Rousselle Industrie SA, a maker of machinery for paint manufacturers in northern France, almost collapsed in 2020 after the pandemic disrupted supply and its clients' businesses.
The 10-person company was saved by the equivalent of $360,000 in loans under a government program that guaranteed debt and deferred interest payments for 12 months.
Regulators Tell Banks It Is Time to Stop Using Libor
Regulators are ramping up efforts to end Libor trades by year-end.
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